How to rollover a spouse's IRA into your own

Dan Moisand,
a Principal at Moisand Fitzgerald
Tamayo, LLC in Melbourne and Orlando, Fla., is one of the financial
planning profession’s most respected practitioners advising retirees and near
retirees. Dan’s thoughts can be found in bylined articles in most major
publications for financial planners and a slew of financial planning related
publications have featured him as one of America’s top advisors and was recently
named one of
"15
transformational advisers" by InvestmentNews. A past national
President of the Financial Planning Association (FPA), his service to the
profession includes three years on the CFP Board of Practice Standards crafting
the standards to which all US CFP’s must adhere and serving as Chairman of the
CFP Board’s Discipline and Ethics commission, the body that judges complaints
against CFP licensees. A frequent presenter at such events in the U.S., Dan has
spoken to planner groups on five continents and in recent years has led
delegations of U.S. planners to Russia and China on behalf of the FPA.

One of the unique powers of a surviving spouse is the ability to rollover their deceased's IRA into their own IRA. This is usually the default action when one spouse dies but in this week's featured question, I touch on why widows and widowers might be wise to consider other options.

Q.Can a wife rollover her husband's traditional IRAs upon inheriting them at his death or must it be a trustee-to-trustee transfer? I was getting conflicting information. – Rosemary

A. Rosemary, wives have special powers over their husband's money. Forgive the quip, but with respect to the tax code, only spouses can rollover a deceased person's IRA into their own IRA. Still, I have always preferred a trustee-to-trustee transfer over a rollover. Plus, if you have other IRAs, a new rule in 2015 limits the use of regular rollovers to once every 12 months — but there’s no limit on the number of trustee-to-trustee transfers.

Frank Fennema/Shutterstock.com

Transferring the IRAs into your IRA may or may not be the best choice. By transferring his IRA into your IRA, the moneys are treated as if they were always yours. So if you are older, this will make the required minimum distributions start earlier or if you are over age 70 ½ and already subject to RMDs, make your RMDs larger. If you are under 59 ½, the exemption for distributions due to death wouldn't apply if you transferred the IRA into your own IRA so any distributions until you reached age 59½ would be subject to a 10% penalty for early distributions.

You should talk to your adviser about setting up a spousal beneficiary IRA. You can tap that pre-59½ without the 10% penalty and roll it into your own IRA after you reach that age. A spousal inherited IRA allows you to treat the account as if he were still alive for RMD purposes, which will lower your RMDs if you were born before your husband. You can also name your own beneficiaries.

Q.Hi Dan, Thanks for your wonderful insights in the following article:New IRA rollover rule coming in 2015. Like many, I'm confused what impact IRS announcement 2014-15 has on the so called backdoor Roth IRA conversions (for those who cannot directly contribute to Roth IRA)? My broker sends me Form 1099-R for such conversions, and states the rollover as taxable amount, even though there is no check received by me. Because money goes out of Traditional to Roth, technically this is still a rollover, not transfer, right? Does the above tax ruling mean:

a) I must do the whole conversion in one-shot (i.e. I cannot make multiple contribution to Traditional IRA, up to the annual maximum, followed by individual conversions)?

b) If I have done one such conversion, then I can't even a rollover 401(k) to a traditional IRA for another 365 days (in case I change jobs)? Again I'm talking about trustee-to-trustee transfer only, but because of source and destination being different account types, I would receive the Form 1099-R.

c) In general, is receiving multiple 1099-R for same tax year automatically a red flag?

Thanks in advance — S.S.

A. The ruling doesn't impact your conversions. The ruling only applies to rollovers in which you receive the check and rely on the 60-day rule to avoid taxes. The Bobrow case doesn't apply to "trustee-to-trustee transfers,” also sometimes called "direct transfers" or "direct rollovers" because you never receive the funds yourself and there is no limit to the number of such transactions you can perform in any year.

The conversion is coded by the issuer of the 1099-R so the IRS knows it is a conversion and won't assess the usual 10% penalty for distributions before age 59½. Multiple conversions coded correctly should not be a red flag.

Q. I was notified that I am a beneficiary in my sister's trust. I'm 77 and have a spouse. Must I rollover the Roth IRA? — M.S.

A. I'm sorry to hear of your sister's passing, M.S. It was nice of her to pass these funds on to you.

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